The last week’s market highlights:
Each week, we present our featured topics in the context of the major themes listed below from Nuveen’s 2021 Outlook:
- U.S. economy: Getting worse before it improves.
- Global economy: Ready to get back to normal—with the help of vaccines.
- Policy watch: No Federal Reserve interest-rate hikes until at least 2023.
- Fixed income: A modest-risk overweight with a focus on credit sectors.
- Equities: Lean toward small caps, emerging market shares and dividend payers.
- Asset allocation: Consider benefits of active management amid idiosyncratic opportunities.
Quote of the week:
"Challenges make you discover things about yourself that you never really knew.”
– Cicely Tyson
– Cicely Tyson
U.S. consumer spending bottomed in December and roared in January
After declining from October through December, U.S. retail sales blew away expectations in January. The headline figure jumped 5.3%, while core sales, which exclude more-volatile spending on items such as automobiles, gasoline and building materials, grew 6%.3 Both numbers would represent solid results for an entire calendar year, let alone a single month. All 13 categories of core spending rose, versus just five the previous month.4 On a year-over-year basis, which obviously still includes the initial lockdown months of last spring, core sales were up more than 12% — marking the fastest annual growth rate in the nearly 30-year history of the series.5
While the remarkable pace of retail sales growth came as a surprise, people were bound to open their wallets. The fiscal relief bill passed in late December boosted many bank accounts by $600, and those who have lost their jobs or are living paycheck to paycheck tend to spend most, if not all, of their income on goods. They certainly did so after receiving stimulus checks as part of the CARES Act last March. We would expect them to do so again if Congress passes President Biden’s proposed $1.9 trillion relief package, which would deliver up to an additional $1,400 per person, possibly as soon as next month.
Not all of the pandemic relief provided to individuals (whether in stimulus checks or via recently renewed enhanced unemployment benefits) was spent on goods. Some of the money was likely saved or used to pay down debts or other obligations, according to the Federal Reserve.
But overall, we expect consumer spending on goods to contribute positively to GDP in the first quarter of 2021 after detracting slightly last quarter. The big picture for consumers looks good, too, and should continue to improve: savings rates remain high, while home values and nest eggs have recouped their losses from early 2020 and then some.
In contrast, we’re mindful that consumer confidence is fragile, especially among those with incomes below $75,000, according to the University of Michigan’s preliminary consumer sentiment survey for February.6 And compared to their non-U.S. developed-market counterparts, U.S. consumers are on somewhat shakier ground. That’s because U.S. economic policy around the pandemic has focused on sending checks directly to individuals and heavily subsidizing unemployment. In other countries, the goal has been to keep workers attached to jobs through payroll subsidies. In the U.K., for example, eligible employees receive a check of up to 80% of their wages while not working or working only part-time. The benefits of keeping payrolls intact are twofold: employees gain immediate financial relief, and business owners are spared from having to hire and retrain staff once they reopen their doors.
Either approach, however, leaves consumers with plenty of pent-up demand to spend on services they’ve largely avoided — such as travel and dining — once the pandemic has passed and restrictions are eased.
Fortunately, recent data shows that countries are succeeding in slowing the spread of COVID-19. According to Johns Hopkins University, the 7-day rolling average of daily new cases is down 74% from its January peak in the U.S., and down 60% in Europe’s five largest economies.6 We know from experience that this will lead to a further drop in hospitalizations and fatalities from COVID-19, and to an easing of the government-imposed economic restrictions intended to prevent them. This progress has been made even though less than one quarter of the population of any of these countries has been vaccinated.
As we’ve long maintained, only a sustained reduction in the spread of the virus can produce a true return to economic normalcy, and only effective vaccines offer a durable solution to the crisis. Thus far, the U.S. and U.K. are well ahead of the 27-nation European Union (EU) in terms of vaccinations on a per capita basis, which has given them a head start toward achieving herd immunity.7
The disparity is wide enough to cause us to downgrade the EU’s economic prospects — at least the timing of any eventual bounce — relative to both the U.S. and U.K. European countries have generally implemented stricter virus mitigation policies than the U.S. These were intended to not only save lives, but also to enable their economies to return to their former strength sooner. But the latter might not happen if the EU lags in reaching herd immunity.
Things we’re noticing…
In addition to last week’s headlines about the pace of COVID-19 vaccinations, unusually severe weather and the run-up in Treasury yields, we discovered these tidbits:
- There’s no place like home. Americans took out $1.2 trillion in mortgages during the fourth quarter, the highest quarterly total since data became available in 2000.8 Borrowing costs plummeted last year amid the Fed’s decision to cut interest rates to zero and initiate aggressive monthly quantitative easing purchases.
- Yields on high-yield corporate bonds are not so high. The relentless search for income has driven high yield bond prices up and their yields down. In fact, on February 8 the yield on the Bloomberg Barclays U.S. high yield index dipped below 4% for the first time; it closed at 4.01% on February 19.9 Rates are low outside the U.S. as well, driving down yields on high yield corporates. Investors, apparently unconcerned by the prospect of not being compensated adequately for the degree of risk they’re taking, are confident that revved-up U.S. and global economic growth will limit defaults by these lower-quality issuers.
- Who’s volatile? Not the U.S. stock market. The S&P 500 Index has endured a somewhat choppy start to the year. But despite a short-lived spike during the recent commotion around “meme” stocks, the VIX (Wall Street’s so-called “fear gauge”) has averaged 23.8 in 2021 to date, versus 29.1 in 2020. Ample liquidity and improving macroeconomic conditions could push the VIX even lower by year-end, approaching its long-term average of 20.1.10